Will the Next Greek Creditor Please Stand Up?

Don’t look now folks, but it looks like Greece is creeping back into the spotlight!

Apparently, our buddies from the EU, IMF, and ECB inspection commission – Troika representatives tasked to dig deeper into the state of Greece’s finances – are taking a one week break. Unfortunately, the markets linked this “vacation” with the possibility that Greece’s financial situation is in shambles and that the government could be faced with a budget gap 30 billion EUR!

So why is this a problem, you ask?

In order for Greece to qualify for the next round of financial aid worth 31.5 billion EUR, part of the agreement was that it would implement structural changes that would allow the government to close the deficit gap.

To their credit, Samaras and Finance Minister Yannis Stournaras have been working hard to help push Greece out of its rut. The two have recently just finished their debt-reduction plans that should shave off 11.5 billion EUR off the deficit. In addition to that, the package expects to rake in an additional 2 billion EUR from tax revenues.

The problem though is, not only does it have to pass through the Greek Parliament, but it also has to be approved by the Troika. If it doesn’t get approved, there’s a better than good chance that Greece may not receive any bailout funds. Consequently, this may leave the government no choice but to go bankrupt and eject itself from the euro zone!

A few economic gurus say that not all hope is lost for Greece though.

Greek Finance Minister Yannis Stournaras says that the government can still sell short-term debt in the market to raise money. Another option could be to convince the Troika to grant it a two-year extension. Analysts say that with the extension, austerity measures don’t have to be as drastic and the economy will have more room for growth.

Many are skeptical about these plans though. For one, demand for Greek debt is very limited and borrowing costs are high. Yield on 12-week bills issued this week was at 4.3%. Let’s also not forget that Greece has already been bailed out twice, making it more difficult for the Troika to agree to an extension. On top of that, a 2-year leeway would cost an around extra 15 billion EUR.

It is in everyone’s best interest to keep Greece in the euro zone. But if it won’t be able to solve the problem on its own, who will help it?

ECB

A few euro zone officials have volunteered the ECB to step in. According to them, the central bank could reduce Greece’s need for money either by extending the maturity on the Greek bonds that it holds or by buying new bonds.

However, “extending” a helping hand will be much easier said than done for the ECB. It’s already facing criticisms about its offer to buy unlimited bonds. In fact, ECB executive board member Jeorg Asmussen has already announced that the bank is legally bound by law not to partake in any restructuring.

IMF

Investors are also looking at the IMF to come to Greece’s rescue. Unfortunately, market junkies say that the fund isn’t likely to shoulder the monetary burden as it is already heavily exposed to Greek debt.

As it stands, the country owes the IMF 9.5 billion EUR in 2014 and 10.8 billion EUR in 2015 for loan repayments and interest.

EU

Greece’s neighbors are also urged to ease its burden by writing off some (or maybe all) of the 53 billion EUR loans that they lent it back in May 2010. Err, I don’t think that idea will fly with EU governments though, especially Germany. More loans would need the approval of the German parliament and Chancellor Angela Merkel wouldn’t want to risk losing allies that could lead to a government crisis.

It’s no surprise that none of the three members of the Troika is excited about providing Greece with more money. However, let’s put things in perspective. Isn’t 30 billion EUR a small price to pay compared to the cost of a euro zone break up?

The way I see it, at least one of these three potential creditors have to step up. The question is, who will it be?

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